German Tax Law

According to German tax law only products created, marketed or realised as a profit or surplus in Germany are subject to tax in Germany The state provides infrastructure and the legal framework. It ensures internal and external security in which everyone can develop freely. This applies to everyone (also to foreign investors).

The German tax system adheres to these principles even though these solid principles are constantly put under pressure by motives such as redistribution and benefactions primarily during election campaigns. The tax exemption for income related to disposal of shares was regulated in the last big reform of 2000 in order to follow the basic principle not to be subject to double taxation.

The reverse charge procedure for Value Added Tax (VAT) is a role model for Europe and Germany. All business associates of German recipient of benefit are allowed to make out invoices for services in Germany VAT-free. The domestic entrepreneur owes the German VAT. He deducts this debit as an input tax from his VAT liability. The foreigner does not have any formalities.

With regard to taxation, there is a difference between incorporated companies and partnerships. Incorporated companies (joint stock companies, limited liability companies, cooperatives) are subject to (federally) standardized corporation taxes.

In addition to that, the communities raise municipal trade taxes. The taxed profit (approximate 38 percent) remains tax-free when being distributed to another incorporated company. The half-income system (50 percent of the distribution/ dividends to domestic shareholders are subject to income tax) will also apply to all dividend payments from foreign corporations received by German corporate and non-corporate shareholders. It is 15 percent for low income and – as from 2007 - 45 percent for higher income over 250.000 euros (500.000 euros for married couples). The charge increases progressively with the amount of income.

The taxation of partnerships (general/limited partnership) has other rules: the profit of private partnerships is taxed as is the shareholder has made his profit all by himself.

Corporation tax does not incur. The profit of partnerships is subject to one-off taxation (the normal income tax of the shareholder).

Partnerships also have to pay local trade taxes which are normally set off against income taxes. From the fiscal point of view, it is impossible to generalize about which taxation is more favourable since it depends on the fact how much profit the entrepreneur wants to keep for his company. In case of full profit distribution partnerships appear to be more favourable otherwise (full retention) incorporated companies are more opportune.